The block may be in trouble as the economy deteriorates, but Cash App could save it for now
On paper, Block Inc.’s varied businesses are all potentially susceptible to a weakened economic environment, and revenues and profits are expected to decline from a year ago. In reality, the story could be more nuanced, at least for now.
SQ Block,
is Square’s (relatively) new corporate name, and it’s home to a variety of businesses, including a seller services segment that goes by the Square moniker. Block is also home to the fan-favorite Cash App service and Afterpay, the newly acquired buy-it-now and pay-later operator.
Square, the merchant segment, could be vulnerable to a pullback in discretionary spending, although some Square vendors may fare better than others. Other payment companies have reported that dining volumes are growing nicely as people travel and generally clamoring to do more away from home.
The company’s Cash App business could also feel the impacts of a tougher spending landscape, but the Cash App is tied to a debit card, and people have traditionally used more debit for essential items they’re less likely to happen. Susquehanna analyst James Friedman notes that the company’s Cash Card product “is exposed to high inflation spending categories such as gas and restaurants.”
Then there is the bitcoin trading aspect of the Cash App business. While falling digital asset prices have likely dampened commercial interest, bitcoin BTCUSD,
is only a small contributor to Block’s gross profit.
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Finally, there’s the buy-now-pay-later Afterpay business, recently acquired by Block. Investors have generally been wary of how the BNPL industry would crumble if consumers begin to feel more financial pressure, and there have been mixed data points in recent weeks on the health of the BNPL. consumer credit, but mainly with regard to traditional credit.
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Expect the company’s Cash app to be the star of the show when Block releases its results on Thursday afternoon, as the company may find itself at the heart of the controversy surrounding Block’s stock.
“Investors are encouraged by healthy Cash App/’Teen Cash App’ trends, but are concerned about the impact a cyclical downturn could have on Cash App and the seller,” wrote Citi analyst Peter Christiansen. Research.
Deutsche Bank’s Bryan Keane wrote that he believed the Cash app could provide a positive surprise in the quarter. According to him, the “company’s spending velocity will remain resilient in the face of an economic downturn.”
What to expect
Revenue: Analysts tracked by FactSet expect Block to report $4.33 billion in revenue, up from $4.68 billion a year earlier.
Analysts, however, generally view Block’s gross profit as a proxy for revenue, as the company’s revenue is skewed by features such as bitcoin trading, which generate significant revenue with minimal margin. The FactSet consensus is forecasting $1.48 billion in gross profit, up from $1.14 billion a year earlier.
Earnings: The FactSet consensus forecasts 16 cents of adjusted earnings per share in the second quarter, compared to 66 cents a year earlier. According to Estimize, which relies on projections from hedge funds, academics and others, the average estimate calls for 18 cents of adjusted earnings per share.
Movement of stock: Block shares rose after seven of the company’s last 10 earnings reports. Block’s stock has fallen 71% in the past 12 months as the S&P 500 SPX,
decreased by 7%.
Of the 47 analysts tracked by FactSet who cover Block stocks, 34 have buy ratings, 11 have hold ratings and two have sell ratings.
What else to watch out for
RBC Capital Markets analyst Daniel Perlin is curious to see if the upcoming earnings report brings a “reset” that could make Block stocks more attractive.
With the stock having more than halved so far this year, he wrote that “it’s hard not to want to be more constructive” on the name. Still, “the likelihood of a modest reset in numbers is likely warranted in the current environment given concerns about a possible recession, which would impact end markets and SQ consumers,” Perlin continued. “Assuming Q2/22 delivers this reset, we think investors could start to re-engage in the stock.”
Perlin will also watch for signs of consumer spending pressures. “[W]We believe the financial health of subprime and affluent consumers is highly bifurcated, which could negatively affect Cash App payment volume in this and future quarters as we believe Cash App users are shifting to less affluent demographic groups, who are most affected by high inflation because it relates to non-discretionary spending,” he wrote.
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Barclays analyst Ramsey El-Assal is intrigued by many big opportunities ahead of Block, including the international expansion of the Cash app and integrations between Afterpay and Block’s core businesses.
These initiatives could have bigger impacts later this year and into next year, but El-Assal said it was “unlikely that SQ would provide more detailed guidance on the upcoming call in the second quarter. , following the recent precedent set by the company”.
Susquehanna’s Friedman is also interested in Block’s Afterpay strategy.
“We believe the company is prioritizing loss mitigation over aggressive growth in the coming quarters,” he wrote. “According to SQ, management believes that many of BNPL’s merchant relationships will become non-exclusive in the coming years. Instead of fighting for those relationships now, SQ is playing the “long game” with Afterpay.
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